10.23 Chapter 18 - Econ 101 Introduction to Microeconomics Professor Richard V Burkhauser 18 The Markets for the Factors of Production Key Concepts

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Click to edit Master subtitle style Econ 101 Introduction to Microeconomics Professor Richard V. Burkhauser 18 The Markets for the Factors of Production
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Econ 101 – Professor Burkhauser Key Concepts factors of production, p. 394 production function, p. 396 marginal product of labor, p. 396 diminishing marginal product, p. 396 value of the marginal product, p. 397 capital, p. 406 derived demand, class output effect, class substitution effect, class
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Econ 101 – Professor Burkhauser Short Run Demand for Labor in the Cookie Industry Capital Fixed Labor Variable
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Econ 101 – Professor Burkhauser Firm Industry Cookie Market Figure 18.1 Firm s Output Choice in the Short Run P * Q* q* D S(W*) MC(W*)
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Econ 101 – Professor Burkhauser Firm s Output Choice in the Short Run Profit maximization condition: P = MC P* determined by market Firm takes P* as given Chooses q* to maximize profit
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Econ 101 – Professor Burkhauser Demand for Labor is a Derived Demand P* = MC MC = w*d l /dq P*dq/d l = W* Value Marginal Product (VMP) = W* See Table 13.1.
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Econ 101 – Professor Burkhauser Table 13.1 Relationship between Marginal Physcial Product and Marginal Cost 5/2 5 66 5 7 5/4 5 64 5 6 5/5 5 60 5 5 5/10 5 55 5 4 5/15 5 $2.50 2 $1.25 4 $1.00 5 $0.50 10 $0.33 15 45 5 3 $0.25 5/20 5 20 30 5 2 $0.50 5/10 5 10 10 5 1 - - 5 0 0 5 0 MC w(d l /dq) w/(dq/d l ) Wage (w) MPP dq/d l Total Output (q) Capital (k) Labor ( l )
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Econ 101 – Professor Burkhauser W L Industry Firm Labor Market Figure 18.2 Demand for Labor in the Short Run S D(P*) D(P*, K0) L* W* l *
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Econ 101 – Professor Burkhauser Firm s Labor Demand in the Short Run Profit maximization condition: VMP = W* W*: determined by the market Firm takes W* as given Chooses l to maximize profits In equilibrium, l will exactly map into q for a given production function (Dual)
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Econ 101 – Professor Burkhauser Table 18.1: How the Competitive Firm Decides How Much Labor to Hire Labor K0 Cookie Output (q) Marginal Physical Product Price (P*) Value MP (P*dq/d l ) Wage (W*) MC W*/(dq/d l ) 0 10 0 -- $2 -- $20 -- 1 10 5 5 $2 $10 $20 $4.00 2 10 15 10 $2 $20 $20 $2.00 3 10 30 15 $2 $30 $20 $1.33 4 10 50 20 $2 $40 $20 $1.00 5 10 65 15 $2 $30 $20 $1.33 6 10 75 10 $2 $20 $20 $2.00 7 10 83 8 $2 $16 $20 $2.50 8 10 88 5 $2 $10 $20 $4.00 VMP and MC
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Econ 101 – Professor Burkhauser Question 18.1: Suppose that eight workers can manufacture 70 radios per day, and nine workers can manufacture 90 radios per day. If radios can be sold for $10 each, the value of marginal product of the ninth workers is a) $200. b) $900. c) 20 radios. d) 90 radios
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Econ 101 – Professor Burkhauser Figure 18.3 Derived Demand Firm s Demand for Labor when Price of Cookies = $2 4 $40 5 $30 6 $20 7 $16 8 $10 L VMP Price of Cookies = $2 $1 0 Price of labor 6 $2 0 5 $3 0 4 $4 0 D(2*,K0) 7 $1 6
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Econ 101 – Professor Burkhauser Figure 18.4 Marginal Cost of Cookies for a Competitive Firm (Wage = $20) $/unit q $1. 00 $2. 50 $1. 33 $2. 00 $4. 00 5 3 0 5 0 6 5 7 5 1 5 8 3 8 8 MR MC (W = $20) 8 7 6 5 4 3 2 1 l
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Econ 101 – Professor Burkhauser Question 18.2: Suppose medical research provides evidence that eating bananas provides far greater health benefits than was previously thought. The resulting change in the demand for bananas a)
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This note was uploaded on 03/14/2008 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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10.23 Chapter 18 - Econ 101 Introduction to Microeconomics Professor Richard V Burkhauser 18 The Markets for the Factors of Production Key Concepts

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